I get personal finance. If I wish to buy a car or something then I can go to a bank and get a loan at a set percentage, with the requisiste consequences if i default on said loan - such as seizure of assets for a secured loan.
However, when we are talking about countries, how does this work. Where does the UK government go for it’s loans (or other types of credit)? What are the consequences if the government can’t meet repayment terms? Does the country get repossessed?
I would love to gain some understanding of this area.
Governments borrow money by selling bonds, just like companies. A bond is basically a loan. I, the finance minister of Friedostan, announce that my country needs $100 to secure the future of our glorious revolution. I go to banks, other countries, or individuals and sell them a piece of paper for $100 that guarantees that I will pay them back with interest according to certain terms over a certain period of time. The people who buy the bonds can then sell them to other people if they lose confidence in my ability to pay or just want some fast cash – that’s the bond market.
Sometimes. But most often the country in question announces that they can’t pay their debt, so the bondholders are SOL. In that case, their credit rating will be ruined for decades, and it will be extremely difficult for them to borrow in the future; or they will have to pay very high interest rates. In general, the international community will often try to prevent defaults, such as by forgiving certain debts (debt relief) or by allowing the country to refinance on condition of reducing government spending.
Actually, personal finance isn’t very different than a government that sells bonds, except that the government can auction the bonds and have investors bid the price up or down. A government bond is essentially an unsecured loan. Investors can include other governments, big banks, and even simple folk like you and me. A U.S. Savings Bond is a “loan” to the government. And the World Bank is a bank for countries to borrow from other countries.
The consequences to a government that can’t pay off are similar to you or me filing bankruptcy. No, there’s no repossession involved, it’s more like a liquidation. The government can wipe out its debts, but at the same time it wipes out its credit. No one will buy government bonds (i.e., lend), foreign businesses won’t invest in that country, etc.